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Pages 1 - 64 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA Before The Honorable Charles R. Breyer, Judge In re Volkswagen Clean Diesel ) Marketing, Sales Practices, and) Products Liability Litigation, ) ) ) NO. C 15-md-02672 CRB ) BRS, ) Plaintiff, ) VS. ) NO. C 16-3425 CRB Volkswagen AG, ) Defendant. ) ) San Francisco, California Tuesday, June 27, 2017 TRANSCRIPT OF PROCEEDINGS APPEARANCES : For Plaintiff VW : LIEFF, CABRASER, HEIMANN & BERNSTEIN 275 Battery Street - 29th Floor San Francisco, California 94111 BY: ELIZABETH J. CABRASER DAVID S. STELLINGS For Plaintiff PSC: BLB&G 1251 Avenue of the Americas New York, New York 10020 BY: JAMES A. HARROD ADAM HOLLANDER Reported By: Rhonda L. Aquilina, CSR #9956, RMR, CRR Official Court Reporter
Transcript of Pages 1 - 64€¦ · 27/06/2017 · person. You know, obviously the Class Period here runs from...
Pages 1 - 64
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
Before The Honorable Charles R. Breyer, Judge
In re Volkswagen Clean Diesel )Marketing, Sales Practices, and )Products Liability Litigation, )
)) NO. C 15-md-02672 CRB
) BRS, ) Plaintiff, ) VS. ) NO. C 16-3425 CRB Volkswagen AG, ) Defendant. ) ) San Francisco, California Tuesday, June 27, 2017
TRANSCRIPT OF PROCEEDINGS APPEARANCES: For Plaintiff VW : LIEFF, CABRASER, HEIMANN & BERNSTEIN 275 Battery Street - 29th Floor San Francisco, California 94111 BY: ELIZABETH J. CABRASER DAVID S. STELLINGS For Plaintiff PSC: BLB&G 1251 Avenue of the Americas New York, New York 10020 BY: JAMES A. HARROD ADAM HOLLANDER Reported By: Rhonda L. Aquilina, CSR #9956, RMR, CRR Official Court Reporter
APPEARANCES: (CONTINUED) For Plaintiffs US. DEPT. OF JUSTICE: UNITED STATES DEPARTMENT OF JUSTICE Environmental & Natural Resources Div. P.O.Box 7611 Washington, D.C. 20044-7611 BY: JOSHUA H. VAN EATON BETHANY ENGEL For Plaintiffs US. DEPT. OF JUSTICE: OFFICE OF THE ATTORNEY GENERAL State of California 455 Golden Gate Avenue - Room 11000 San Francisco, California 94102 BY: NICKLAS A. AKERS For Plaintiff FTC: FEDERAL TRADE COMMISSION Bureau of Consumer Protection 600 Pennsylvania Ave., N.W. Mailstop CC-9528 Washington, D.C. 20580 BY: JONATHAN COHEN For Volkswagen: SULLIVAN & CROMWELL LLP 125 Broad Street New York, NY 10004 BY: ROBERT GIUFFRA, JR. SHARON L. NELLES DIANE L. MCGIMSEY For Porsche: ALSTON & BIRD One Atlantic Center 1201 West Peachtree Street Atlanta, GA 30309-3424 BY: KARA F KENNEDY For Defendants Bosch: CLEARY, GOTTLIEB, STEEN & HAMILTON, LLP 2000 Pennsylvania Ave., NW Washington, D.C. 20006-1801 BY: MATTHEW SLATER
APPEARANCES: (CONTINUED) For Michael Horn: SCHERTLER & ONORATO 1101 Pennsylvania Avenue, NW, Ste. 1150 Washington, D.C. 20004 BY: JOSEPH A. GONZALEZ
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Tuesday - June 27, 2017 8:00 a.m.
P R O C E E D I N G S
---000---
THE CLERK: Calling civil action C 15-MD-2672, In re
Volkswagen "Clean Diesel" Marketing, Sales Practices, and
Products Liability Litigation, and civil action C 16-3435, BRS
versus Volkswagen AG.
Counsel, please step forward and state your appearances
for the record.
MS. CABRASER: Good morning, Your Honor. Elizabeth
Cabraser with Cabraser, Heimann & Bernstein for plaintiffs.
With me is my partner David Stellings.
MR. VAN EATON: Good morning, Your Honor. Josh van
Eaton for the United States, with my colleague Bethany Engel.
THE COURT: Good morning.
MR. VAN EATON: Good morning.
MR. AKERS: Good morning, Your Honor. Nick Akers for
the California Attorney General's Office, and the California
Air Resources Board.
MR. COHEN: Good morning, Your Honor. Jonathan Cohen
for the Federal Trade Commission.
THE COURT: Good morning.
MR. HARROD: Good morning, Your Honor. James Harrod,
Bernstein, Litowitz, Berger & Grossmann for plaintiffs in the
securities cases. With me is Adam Hollander.
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MR. GIUFFRA: Good morning, Your Honor. Robert
Giuffra with Sullivan & Cromwell. With me today is my partner
Sharon Nelles and Diane Gimsey also for Sullivan & Cromwell, a
partner of Sullivan & Cromwell.
And I think our plan today is Ms. Nelles will give you a
report on where we stand on some of the implementation of the
various settlement agreements, and then we have to deal with
the securities motion to dismiss, and then, you know, there may
be some other housekeeping issues Your Honor would like to
raise. Thank you.
MR. GONZALEZ: Good morning, Your Honor. Joseph
Gonzalez for Schertler & Onorato on behalf of Michael Horn.
MS. KENNEDY: Good morning. Kara Kennedy with Alston
& Bird for the Porsche defendants.
THE COURT: Good morning.
MR. SLATER: Good morning, Your Honor. Matthew Slater
of Cleary, Gottlieb on behalf of Robert Bosch GmbH, and Robert
Bosch, LLC.
THE COURT: All right. And I would like to remind all
of you that we are on Court Call, and so when you do approach
the microphone, please identify yourself for the benefit of
those who are not in the courtroom, but are listening to these
proceedings.
The order in which I'd like to take things is that I first
want to address the motion to dismiss the consolidated
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securities class action case.
I have read a great deal on what has been presented by the
parties, and I have some impressions that I thought I should
share with you.
In terms of the control person, which is one of the issues
as to whether or not Mr. Horn and Mr. Diess; is that correct,
Dice?
MR. GIUFFRA: Yes, as to Mr. Diess.
MR. GONZALEZ: Yes, Your Honor.
MR. GIUFFRA: The last time Your Honor had dismissed
the claims as to Mr. Diess.
THE COURT: That's right. And the question is
whether, whether there is now in the amendment sufficient
allegations in order to reach these individuals as control
people. That's basically the issue. And the Court has
concluded that there is, and that the complaint would support
liability, if proven, of these individuals.
The more interesting question, at least to the Court, is
what is the appropriate time period to capsulate the various
statements that were issued at different times by Volkswagen.
And it sort of is a two-edged sword, as I understand it. There
is no question that -- and I hope I'm not going to be too far
off on dates, but in May, I think it's May of 2014, but let me
just take a look.
(pause in proceedings.)
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In May of 2014, the argument is that Volkswagen knew or
should have known that its losses related to the defeat device
were probable or that the likelihood of losses was more than
remote.
As I understand it, it was at that time that Volkswagen
took charge -- and I may be off on the dates, so I want to make
sure I'm right here -- took charge of 67 million Euros; is that
correct?
MR. GIUFFRA: No, Your Honor. Let me see if I can
help just provide a little bit of context.
Volkswagen took a charge in the third quarter of 2015 for
6.7 billion Euros.
THE COURT: Right.
MR. GIUFFRA: That was after September 18 when the
defeat device was announced. And, in fact, in Your Honor's
last decision on this issue, Your Honor made the point, which
we think remains correct, that as to Mr. Diess, the fact that
they did a provision for $6.7 billion and it turned out not
needed to be increased over time, and given the absolute
absence of any allegation in the complaint that anyone knew
that the provision needed to be higher as of the date when they
set that provision, that that claim as to Mr. Diess should be
dismissed.
Mr. Diess, who was the head of the Volkswagen brand,
joined the company in July of 2015, you know, within months of
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the announcement of the existence of the defeat device. And in
your last decision Your Honor held that he was not a control
person. You know, obviously the Class Period here runs from
2010 to 2016. Our position is on the issue of the control
person, they hadn't pled anything differently than what they
had in the original complaint as to Mr. Diess.
And I think what you're referring to in terms of May 2014,
that's a memo that was sent to Mr. Horn who was not a VWAG, was
not involved in making the financial disclosures, but was the
head of Volkswagen Group of America, and he got a memo saying
what the theoretical finds were.
But as Your Honor held in your decision the last time,
there wasn't anything specifically pled in the complaint as
required under the PSLRA and 9(b) as to Winterkorn and Diess,
the people who were actually involved in making the
disclosures, that they knew that there was a need for a
provision before the provision that was taken in September.
THE COURT: Well, I found that the provision taken in
September I thought was an adequate provision. That is to say
I thought that even though it was --
MR. GIUFFRA: Turned out to be lower --
THE COURT: Well, it was lower than -- well, we're all
in hindsight now. It's lower than what ultimately was
required. It didn't seem -- it didn't seem to be inappropriate
given any number of facts. While there is a theoretical
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exposure, there is no requirement that one set aside or take
charge for what is the theoretical exposure in light of
evidence or knowledge that, as an example, enforcement of these
emissions violations have been far less in terms of dollars
than was -- than occurred in this particular case. That
doesn't say -- that doesn't mean to say the penalty
theoretically couldn't have been as great as it was, but it
does mean that if one takes a look at experience in order to
determine how much one should set aside as a charge or for a
contingent liability, and so forth, that's one of the factors
that one could consider as it should be, as it should be.
Otherwise you would, with every theoretical violation in which
the caps are so high that by virtue of either the amount of
money per violation or the amount of vehicles that were
affected by it, you could simply bring any company to a
standstill by setting out contingent liabilities. So I don't
find that troubling, and I find that that's satisfactory.
But going back for a moment, and you can address it, there
is an allegation that in 2008 Volkswagen was notified by CARB
that there was the potential of liability. And I'm trying to
find that in the complaint. And it references, it references a
letter, and it references a newspaper article. There it is.
MR. GIUFFRA: Your Honor, I would be happy to address
that. That same allegation --
THE COURT: Well, wait a moment.
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(pause in proceedings.)
MR. GIUFFRA: That same allegation, Your Honor,
basically we go through what the allegation is. The allegation
is that --
THE COURT: Paragraph 163, so we're all talking about
the same thing.
MR. GIUFFRA: Yes. And Your Honor addressed that very
allegation at page 30 of the original motion to dismiss
decision. And, in fact, what Your Honor said at page 30 was
for example, although plaintiffs allege that VWAG knew that it
faced, quote:
Potential EPA finds of 37.5 and CARB finds of 5,000
for each affected car in the United States, close quote.
And then citing at that point it was complaint 220: They
do not provide sufficient allegations to infer that VWAG would
have had such knowledge as early at November 19, 2010, which
was the start of the Class Period. The 2010 is the end of Your
Honor's decision.
But the point, Your Honor, is that that particular notice
that they're talking about is a generic notice saying that if
you violate these laws in 2008, you face these theoretical
finds.
THE COURT: That's my question. Let me read what is
in the complaint now, okay.
MR. GIUFFRA: Yes.
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THE COURT: Okay. What is in the complaint now at
page 163, is as follows:
The Wall Street Journal likewise reported on October 5th,
2015 that as early as 2006, senior VW engineers recognized and
publicly stated that the company could not produce high
performance diesel vehicles that met applicable emissions
standards.
Further, here's where we get to the point, regulators
suspected and were concerned about defendants' possible use of
defeat devices as early as 2008. On October 14th, 2015, I'm
going to mispronounce this, Sueddeutsche Zeitung, reported that
it -- I assume that's a paper, newspaper -- reported that it
was in possession of documents showing the United States
authorities have been questioning Volkswagen's cars emissions
since at least 2008. Specifically, according to this source,
CARB issued an Executive Order in 2008 demanding a statement
from VW that no defeat device was installed in the engines of
Volkswagen's cars. Otherwise, the letter states, CARB will
withdraw its certification of the vehicles and assess the
penalty of $5,000 per car.
So what I'm saying here is if this story is true, if it's
true these things happened, which I have no idea whether they
did or not, then what does that say about Volkswagen's state of
mind with respect to the probability of this device being
discovered?
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Put it in another way. If the regulator says to
Volkswagen: By the way, by the way we want from you a
certificate saying that you don't use a defeat device. They
say that in 2008. And if you don't give it to us, if you don't
give it to us then we will withdraw our certification, and
furthermore, we will assess a penalty of $5,000 per car.
Now, you can say any number of things about that, which
perhaps could satisfy the Court. One is that's routine. They
do that. It's like you drive along the highway and there's a
sign that says, you know, if drive in the fast lane, or
something, you face a violation of $271. It doesn't say you
are. It doesn't say we're focusing on you. It simply says
what the law is, and that that's not -- that gives you
knowledge of what the law is, but it doesn't give you knowledge
that the regulators are onto you, okay.
And this whole thing -- that is the way I look at this --
is based on are the regulators onto you? Do they have reason
to believe that you are violating the law or the regulations.
There's sort of two components on it. Number one, do they know
what they're doing, and do you know that they know? And if
they know what you're doing, and you know they know, I think
that that is the type of situation in which you have to take
that into account in your accounting, because, you know, how do
you say it, the game is up, you know. I mean, they're onto
you. And you know they're onto you. So your responsibility to
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your shareholders is to take that into account.
Now, looking at that paragraph, that is one interpretation
of it, but it's not the only interpretation at all.
So I don't even know that you're the one who has to
respond to this. It seems to me that Mr. Akers, or somebody,
or plaintiff's counsel does have to respond to it. Is, you
know, what is this article? What does it mean? Is it
unambiguous? And does it give rise to liability? Because then
we're not just talking about 2015, 2016, we're actually going
back from an evidentiary point to 2008 or thereabouts, or 2010
when we begin the Class Period.
So I'll allow you to respond, and anybody who wants to
comment on that could join.
MR. GIUFFRA: Let me start with first principles.
This is a federal securities case governed by 9(b) and governed
by the Private Securities Litigation Reform Act, and so
negligence with respect to reserving, not taking enough of a
reserve, that's not actionable as a matter of law.
Second proposition, Your Honor recognized this in your
decision at page 30 the last time we argued this very same
issue, you've got to look to the scienter, and that's the
principal basis for our decision, our motion. The scienter of
the people who were responsible for making the financial
disclosures, not just a company generally.
And this notion of some collective scienter notion: Oh,
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someone at Volkswagen knew that the theoretical fine if you
violate the CARB rule is $5,000 a car, that doesn't get them
where they need to go in this case, or otherwise Rule 9(b) and
the Private Securities Litigation Reform Act would be a dead
letter.
And courts have repeatedly rejected the notion,
particularly in the reserving context, that one could even
contemplate some notion of collective scienter, which is a
doctrine -- while the Ninth Circuit has said it may be viable
has never really applied it. And the example that gets given
every time is a case called Makor from the Seventh Circuit
where they give the example of, well, if General Motors had
said it was selling a million SUVs a year and hadn't sold any,
okay, a really important and so demonstrably false statement,
maybe that's clearly something that the senior executives
involved in making the disclosures about the company sales of
SUVs would have known about. That's not what this is.
Now, let me take you sort of through it. The same
allegation was made in the original complaint. So an amended
complaint, there's nothing new about this allegation.
Number two, if you just look at the allegation on its
face, Mr. Diess doesn't show up in Volkswagen until 2015.
There's no allegation he knew about this. There's no
allegation that Professor Winterkorn knew about this, not at
all. So they don't connect it to him.
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Number three, the fact as Your Honor pointed out
correctly, the mere fact that, you know, this is a theoretical
violation number doesn't mean that the company had that
exposure. And, in fact, Your Honor -- and I talked about this
the last time we were here -- paragraph 249, okay, that's the
allegation which talks about as late as November 2014, that
Winterkorn receives a memo reporting that there's -- on product
defect issues, and identifies the issue with respect -- this is
paragraph 249 -- that there's an issue with respect to the
diesel issue in America, and it says "North America," excuse
me, and refers to a cost, quote, this is a, quote:
Cost framework of approximately 20 million Euro for
the diesel issue in North America.
And what the plaintiffs say, and this is their allegation
which they're bound to, they say: After being placed on notice
of this, quote -- 249, quote:
After being placed on notice of Volkswagen's emission
cheating, Winterkorn and other top managers did nothing
for months, perhaps out of a cavalier and mistaken belief
that Volkswagen could resolve any U.S. legal issues by
paying a cost-of-doing-business fine."
At this point in time, Volkswagen was earning 12 billion
Euro. So 20 million Euro would clearly not be a material
amount of money to Volkswagen.
Now, obviously what's happened when you use hindsight and
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say, oh, they were wrong. Well, the same thing, Your Honor,
was true in many other cases that I've been involved in. I
represented UBS in the Second Circuit, 2014. The claim was
that senior managers should have known that the bank was going
to suffer $50 billion in losses from mortgage-backed
securities. The case was dismissed by the district, and the
stock drop was $115 billion, way more than here. The case was
dismissed at the district court level, affirmed unanimously on
appeal, because they did not believe particularized facts
indicating that the senior managers, who were involved in
making the disclosures about the company's financial exposures,
knew about the risks that the company faced, and that it was
going to be billions and billions of dollars.
Now, here, what the other side would like to do is
conflate knowledge of the existence of the defeat device with
knowledge that it was going to cost billions and billions of
dollars, and therefore you should have taken up a bigger
reserve. And you can know about a problem, a product defect
problem, which is --
THE COURT: I don't think that's quite what they're
saying. I thought that what they're saying, though they may
very well be saying that, but I think they're saying they
know -- Volkswagen knows about the defeat device. And this
letter -- and we'll have to put some flesh on the letter, who
gets it, where does it go, and so forth -- this letter tells
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them that the regulators know what's going on.
MR. GIUFFRA: There's no --
THE COURT: They may not know the details, but they
know enough to know that unless they are further satisfied by a
representation to Volkswagen, then they are going to withdraw
certification.
MR. GIUFFRA: Your Honor, I'm not aware of any
communications from CARB in 2008, okay, which would have been
no one said that this thing -- that CARB knew about this and
sat on its hands for eight or nine years. I believe -- and
this document again Private Securities Litigation Reform Act
case, you've got to plead things with particularity.
THE COURT: Right.
MR. GIUFFRA: And the mere citation of some newspaper
article that may get facts completely wrong and gets twisted
out of context is not enough to get past the motion to dismiss
in a securities case.
So this particular document, if you just take -- and
again, the same allegation was before the Court the last time
we had a motion to dismiss in this case, and Your Honor agreed
with us that they did not plead particularized facts that the
senior management of Volkswagen knew, and that's the standard,
knew that the reserves were too low.
The only thing that's in the complaint with respect to the
senior managers, in the context of the reserves, is the
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paragraph 249, which I just read to Your Honor, which is
cost-of-doing-business fine and 20 million Euros for a company
that was making 12 billion in profit.
But this particular so-called Executive Order that gets
quoted in 2008, it's two years before the Class Period, it's
not particularized, doesn't say who it went to, and there's
certainly no allegation that I'm aware of that CARB knew there
were defeat devices in Volkswagen vehicles in 2008. This was a
process that went all the way through 2015, particularly it
came to a head, you know, in the period of August and September
of 2015.
Diess isn't at the company in 2008, and there's no
allegation here that Winterkorn received notice of this.
The only other thing that Your Honor referenced before,
which was also before the Court, was that Michael Horn, who was
the president of Volkswagen Group of America, which is a
marketing arm of Volkswagen, someone not involved in the
company's financial statements, was given these same 37,500
number, 37,500 number for a violation. In fact, the ultimate
fines that were paid were much lower than that in any event,
notwithstanding everything.
But, again, the fact is you've got to plead, if you're
going to challenge the reserving of the company, that people
actually knew who were involved in making those reserves, that
the reserves were off, and they have nothing. Zero. And
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that's what Your Honor found the last time we did this, and
they've added nothing to change that.
Your Honor said, at page 30 of your decision, quote:
There are no factual allegations permitting the reasonable
inference that Volkswagen knew or should have known that its
losses were probable during the entirety of the Class Period,
close quote.
That holding is correct. And the only thing they put
forward to try to upset that holding, and the only new
allegations are allegations about, you know, citing, for
example, the statement of facts in the criminal guilty plea
against Volkswagen. That says nothing about provisions. It
says nothing about securities laws. It says nothing about
Professor Winterkorn or Dr. Diess. Their names are not
mentioned. And the only people who were referenced in the
statement of facts are people called "supervisors." And at
paragraph one of the Statement of Facts it expressly says that
these are, quote, senior employees below the level of VW
management board, close quote.
So you need to look at what the new allegations are.
They're either things they've already put before the Court,
Your Honor has already ruled, so that doesn't provide a basis
to reconsider Your Honor's decision, I wouldn't think, or they
cite, you know, documents, the Liang Plea Agreement -- he was
an engineer -- who there's no allegation about anything having
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to do with reserving at all. There's no allegation about
Dr. Winterkorn or Professor -- Professor Winterkorn and
Dr. Diess. And so they really have no new allegations on this
that should cause the Court to reconsider its prior holding,
which was entirely correct and consistent with the law
governing, you know, when someone wants to bring a securities
claim based on provisions.
And, again, remember the standard in this circuit is
"known or deliberately reckless," which is pretty much
knowledge anyway. And you've got to have particularized
allegations, which they simply do not have.
THE COURT: Okay. Let me ask your colleagues here to
respond.
MR. HARROD: Thank you, Your Honor. James Harrod for
the securities plaintiffs.
Mr. Giuffra talked about first principles. I'd like to go
back to what the accounting standards require. And the purpose
of the accounting standards in this case, I'm going to read
from what's in paragraph 262 of our complaint, is the financial
statements are directed at investors in the public, and they
require company management, or the purpose is to determine how
well company management is protecting the resources of the
entity and ensuring the entity's compliance with applicable
loss and regulations.
And the requirement for a provision under IS-37 is based
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on a present obligation as a result of a past event. So the
past event that we're talking about here begins with a decision
in 2006 that it happens at the management board level of
Volkswagen where they're presented with the opportunity to re
engineer their first generation of clean diesel engine. They
choose not to. They deliberately at that point choose to use
defeat devices to accomplish their goal of marketing these
types of products in the United States and in the world. As a
result of that they eventually sell 11 million vehicles, as we
know now, pursuant to that activity.
What then happens is we know that they engage in an active
deception from the outset of that. They come to the United
States and they lie to regulators. And we know that they're on
notice from the fact that the regulators themselves have said
you have to do this. That's what Your Honor quoted.
And I'm going to tell you right now what we know about the
2008 allegation about CARB's notice is what's in the complaint.
I can't -- I can't give you more than what's in there. But
they knew, and they now admit it in the Statement of Facts that
there was an active deception of the U.S. regulators that
stemmed from their use of the defeat devices.
So the question is --
THE COURT: Well, but that's sort of sliding over the
whole thing. Yes, when they embarked upon a pattern of
deception, they knew they were embarking upon a pattern of
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deception, okay.
All right. Okay. Now, the question is to get to the end,
which is did Volkswagen set forth or establish financial
reserves that were adequate to take care of the problem of the
deception? That's not an elegant way of putting it.
MR. HARROD: Right.
THE COURT: But that's really what you're arguing.
You're saying look at this financial statement, look at this
financial -- this period of time, and so forth. The reserves
are either nonexistent or inadequate, given what their conduct
was.
Okay. But the law isn't you go out and you do something
wrong and you are then required, without more, to establish a
reserve in the event you're caught doing what you did that was
wrong. I don't think that's the law. I don't think that's the
law. I mean, essentially what you're saying is that every
company has a legal duty through its accounting system to blow
the whistle to disclose the fact that they're doing something
illegal. I mean, that may be nice in some sort of Sunday
school world, but it's not what is required.
Okay. So you can't glide over the fact that they were
doing something wrong, they knew they were doing something
wrong, and not bring into play what is it that the regulators
knew that was wrong; and what did they do about it, if
anything, or -- and/or what did they tell Volkswagen about what
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they knew was happening? Because, obviously, come
September 15th, everybody knew. It was troubling. So there
wasn't a person around who was involved in this business who
didn't know that a device was used, and it was wrong, and it
would have consequences.
So I had go back to the eighth, the eighth allegation
that's found on paragraph 163 of your complaint, and say, well,
what does that mean? What are you saying there? And I find it
difficult to believe that nobody has gotten that article, or I
don't know whether he's standing by that article and saying
that that's a truthful allegation or it's simply just in the
press as a rumor or what? I don't get it.
MR. HARROD: I mean, we stand by the article, and we
believe it's correct. It's alleged in our complaint, and we
believe we're entitled to an inference that it's true.
THE COURT: Well, what's true? Exactly what's true?
That CARB -- I mean, they're sitting right behind you. They
know whether or not they sent out such a letter. This is a
newspaper, third-party report that a letter was sent. Okay.
Now, you say, well, we accept that as true. Well, I don't know
what that means. I mean, true that it's in the paper? Yeah.
True that it was done? I don't know. I see all sorts of
things in print that aren't true.
So what are you saying? You're saying -- you're saying it
happened or we just assume it happened?
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MR. HARROD: We're saying that they received a letter
from CARB asking them -- inquiring about what does it say?
CARB issued --
THE COURT: It says you better certify your present
devices, because if you don't, we're going to withdraw our
certification.
MR. HARROD: And they did that. And doesn't that put
pressure on them knowing that the regulator is examining this
question?
THE COURT: I don't know what they did. That's my
question to you.
MR. HARROD: Well, we do know what he alleged, Your
Honor, and I think that that's --
THE COURT: Well, what's the basis of the allegation?
MR. HARROD: The basis of the allegation is the
report, these two articles, and the fact that it was a known
requirement that they had to issue these compliance
certifications, which they did by lying.
And they sent -- Mr. Giuffra talked about Liang. Liang
was an engineer at Volkswagen AG in Germany who has now pled
guilty to a number of crimes.
THE COURT: Let me ask you this. Have you read these
two newspaper articles?
MR. HARROD: Yes.
THE COURT: Has there been any inquiry of CARB as to
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whether or not there's any accuracy to these newspaper
articles? The newspaper articles allege activities of CARB.
MR. HARROD: Okay.
THE COURT: That's --
MR. HARROD: Yes.
THE COURT: Don't they? They say CARB did X.
MR. HARROD: Issued an Executive Order in June 2008.
THE COURT: Okay. And you read the article?
MR. HARROD: Yes.
THE COURT: Did you inquire?
MR. HARROD: No.
THE COURT: So you have no idea whether CARB actually
did X.
MR. HARROD: No.
THE COURT: Well, I'm just trying to figure out how --
what weight do I give to an allegation in a newspaper for which
there is no evidence to corroborate it. Try to figure that one
out.
MR. HARROD: I think --
THE COURT: I mean, otherwise you run into complaints
that are simply based on --
MR. HARROD: Speculation.
THE COURT: Well, they're based on the web, they're
based on the Internet, they're based upon, you know, reports,
innuendo. They may be accurate. I'm not saying they're not.
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I'm just saying this is going to be -- I don't think this is
the level of proof that one needs to be satisfied that
liability is to be established.
MR. HARROD: Well --
THE COURT: We're trying to prove scienter. What did
they know?
Now, if this article is true, then somebody knew
something, but --
MR. HARROD: Your Honor, I don't think we need this
allegation in particular to establish that, because we --
THE COURT: Oh, okay. Well, I'll strike it.
MR. HARROD: Well, I would ask you not to do that.
(Laughter)
MR. HARROD: But can I give you some other things that
we know?
THE COURT: Well, you can give me anything you want.
But, I mean, I'm now asking you about paragraph 163. And if
what you're saying is we don't need it, then that's fine with
me.
MR. HARROD: I think what we'd like you to do is to
consider that in the context --
THE COURT: But how do I consider it? What I'm saying
is how do I sit here and consider it? Do I consider it as
true?
MR. HARROD: Yes.
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THE COURT: Not that -- not that there's an allegation
out there, which there is, but do I consider it true that this
thing actually happened? That is, that CARB -- this is a
report of something. Do I consider it -- I consider it true
that there's a report. And you've just told me, you said you
read the articles: Yes, it said exactly what we said it said.
That's fine.
But -- I mean, this isn't like, you know, the old rule
about hearsay. You're really admitting it for the truth of the
matter. You are really saying that what was in that newspaper
actually happened. To which I say to you, okay, what's the
evidence that it happened?
MR. HARROD: Well, but, Your Honor, this is a plea
negotiation. I think we're entitled to make allegations on
information and belief, which is what this is, without having
to provide you with the document that CARB sent to Volkswagen.
THE COURT: Well, at some point I think -- I think you
start getting into very remote -- remote types of complaints.
You can fashion a complaint based upon all sorts of innuendo
and hearsay and -- you know, I mean, listen, the President --
the former President of the United States is born in Kenya. I
mean, there are hundreds of reports out there. There are
thousands of reports. So I should make a finding that he was
born in Kenya? I mean, or I should treat that as evidence that
he was born in Kenya? I should accept that as an allegation?
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I think the question about allegations invites a further
scrutiny, which is what is the basis for the allegation? What
is the basis for the allegation? You say the basis for the
allegation is I read the allegation. Good. Thank goodness,
because you're a responsible attorney, and you actually look at
the things that are -- you allege in your complaint. But that
doesn't give it credibility. That doesn't mean, yeah, I should
believe it.
MR. HARROD: I understand Your Honor's concern. And,
you know, we have the means that we have. I don't know that I
could have gotten that correspondence from CARB. I'm pretty
sure that I would not have been able to.
THE COURT: Well, CARB is here. I don't know if we
have to put them on the spot, but --
MR. HARROD: But can I just -- in the context of
everything else we know, we know that this is an existing
regulatory scheme that they were opposed to, and that they
attempted to evade. And when there was information that became
public about this -- and we knew that they were examining this
question of what the actual emissions of the vehicles were --
CARB immediately did in fact investigate. And there was a
dialogue beginning 2014, in about I think February or March,
that eventually resulted in Volkswagen's fairly spectacular
emissions that they had been doing this since 2008. And
regulators caught them, and they continued to lie.
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So if I could just go back to 2014 when the ICCT study
comes out, and that's sort of the first domino that falls in
this, memos go to --
THE COURT: Well, when you say the first domino that
falls on that, you might be right. But the problem is that the
paragraph I'm talking about is 2008.
MR. HARROD: Right.
THE COURT: So you say that's not a domino, and that's
fine with me.
MR. HARROD: But the difference is, is what's -- what
they're talking about in 2008 is -- the difference is what's
known publicly, and what the regulators were onto is what
happened in 2014.
What Volkswagen knows, and what it is required to do under
the accounting rules to protect its own resources, began in
2006 before they even started selling these cars, and required
them to accrue a provision beginning at that time, because
there was a risk that the liability --
THE COURT: Yeah, you see, I don't buy that argument.
MR. HARROD: Okay.
THE COURT: I mean, because I think that's always --
then I think we've got -- these cases are laid out cases. Show
that they did something wrong. Show that they did something
wrong. They didn't take an accounting charge against it when
they did it. Case over.
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MR. HARROD: So, but --
THE COURT: Done. Finished.
MR. HARROD: But doesn't that place the ability to
commit fraud in the fraudster's ability to hide it for so long?
THE COURT: Yes.
MR. HARROD: Isn't that troubling?
THE COURT: And every wrongdoer has at least the
potential of concealing his or her wrongdoing. That's not --
I'm not lauding it. I'm not encouraging it. I'm simply saying
that's part of it. The act of concealment is part of it. But
there isn't a concomitant duty in the Court's view that as soon
as they commit the act itself, and coincidental with their
concealment they then have to place accounting charges to
account for it in the event that the concealment is
unsuccessful.
MR. HARROD: And I understand that, but isn't that a
function of how serious the fraud is and how likely it is that
they're going to be caught? And internally, Volkswagen --
THE COURT: Yes, I think it is. I think it is that.
I think if it was probable that they are going to get caught --
and I think that's what the cases say -- if it's probable that
they're going to get caught, yes, indeed, they have to do
something about it.
But, here -- and that's why I was so disturbed by the 2008
letter. Because if the 2008 letter is a letter that one looks
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at and says, Aha, to Volkswagen, they're on to us, that
increases, at least in some measure, it increases the
likelihood that you're going to be caught, because now they
know about it.
All right. But the act itself of concealment isn't
evidence that they were going to be caught, and it doesn't in
and of itself increase -- well, it increases the probability of
being caught, because if you never did it, the likelihood of
being caught is pretty remote, since you didn't do it. But
just commonsense would tell us that -- I mean, you and I don't
see eye to eye on that particular issue.
As to Diess, I don't know, you know, that there is enough
here to find him as a control person. I think there is as to
Horn. But if you want to address Diess --
MR. HARROD: Could I go back to 2014 just for a
second? Because I think -- I don't want to belabor this,
because I know if we have a difference of opinion what the
result is likely to be.
But on 2014, I believe that they were caught. They knew
they were caught. They started preparing. It was Gottweis,
and I believe his name is pronounced Neuser (sic), those two
close confidants of Winterkorn, we allege in detail the
relationship between them and Winterkorn in the complaint.
They are charged with preparing memos and preparing estimates
of the math that Mr. Giuffra talked about, 37,5 and 5,500. And
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doing the multiplication, they sent Horn a memo which indicated
that the potential liabilities were 21 and-a-half billion
dollars to, I think, 25 and-a-half billion dollars. So that
gets sent to him in May of 2014.
For five quarters subsequent to that time period, this
information is in the universe of what is known at Volkswagen.
And, in fact, Mr. Giuffra likes to quote about paragraph,
I think it's 249 from our complaint, that Winterkorn, despite
his knowledge of the existence of the defeat devices, and that
they were being used, and that the regulators were now asking
questions of them, and that they were a matter of public report
in this ICCT study, believed that the maximum or the possible
fine was 20 million Euros. That is not reasonable, and it's
inconsistent with everything we know about Winterkorn.
The reason why they use the defeat devices in the first
place is because in 2006, the only alternatives to not using
them would have cost more money.
So if Winterkorn, who is obsessively detailed oriented,
understands that they now use defeat devices -- and I don't
know what the exact number is as of that date, but somewhere in
the maybe millions of cars worldwide and hundreds of thousands
in the United States, and concludes that, well, potential
liability is only 20 million Euros, and the fact that we all
know that the coverup is worse than the crime, as of 2014 not
only was it a matter of public record that the emissions in
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these vehicles were up to 40 times the legal limit, but the
world knew that, and the regulators were inquiring. And what
did Volkswagen do? They continued to conceal that fact for 16,
18 months. They actively, and this is in the Plea Agreement,
the Statement of Facts, concealed that fact from the regulators
in the United States, and lied to them. They actually did a
re-call in December 2014, which was basically a subterfuge to
cover up the fact that there were these emissions compliance
problems.
So knowing that, is it reasonable for Winterkorn or anyone
else at Volkswagen to have believed that they would get a slap
on the wrist for doing this at the scale that they did it for
the amount of time that they did it, and then after being
caught continued to do it. That was not going to provoke a
gentle response, and it didn't.
THE COURT: Let me ask you this. Up until then what
was the largest fine that EPA imposed for a violation of this?
(off the record discussion.)
MR. HARROD: I don't know what the number is. I think
it's a billion dollars. I think there was a diesel case
involving like Navistar and a couple of the truck companies,
and they were fined collectively I think a billions dollars.
But I don't think anybody had ever done something quite like
this.
And, Your Honor, we're here today -- I mean, I'm not going
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to -- you are very familiar with the facts and circumstances of
this case and what the impact of it was. The difference
between 20 million Euros and the accrual that they've now taken
of $18 billion is very significant, and was known at the time
that they were issuing those financial statements, certainly
beginning no later than the second quarter of 2014.
And I don't think that there's -- you know, that
information has been -- you know, Neuser and Gottweis knew
that. They pled guilty. Volkswagen is taking criminal
responsibility -- I'm sorry --
MR. GIUFFRA: It's not true.
MR. HARROD: It's not true.
MR. GIUFFRA: It's not true. It's just not true.
MR. HARROD: Volkswagen AG pled guilty and took
responsibility for the acts of Neuser and Gottweis, among four
other people.
That's true; correct?
So, you know, they -- I don't understand how that
knowledge -- those acts can't be imputed upon Volkswagen.
THE COURT: Okay.
MR. HARROD: But I can address your question about
Diess, and it's the same thing that I just said. Diess was
involved. We don't -- we're not attempting to impose liability
on Mr. Diess for the time before he joined Volkswagen. So, I
mean, we concede that. I think it's pretty clear in the
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complaint.
Second quarter there's a meeting. The financial
statements gone on July 29th. There's a meeting on July 27th.
Your Honor already upheld his liability for that statement
under 10(b).
The third quarter I would just make the same point that I
made previously. They are on -- they have now admitted to
liability. They have a 6.7 billion Euro charge. The potential
liability is anywhere from two and-a-half to three times that.
They are aware of that. I don't think that that was a
reasonable amount of money. And there's allegations in the
complaint that Diess was personally involved in planning the
response to the diesel crisis. And so I think given those
actions, his role as a member of the management board, he
should be held both for the third quarter in these proceedings.
Is it -- did I answer all your questions?
THE COURT: Thank you.
MR. HARROD: Thank you.
MR. GIUFFRA: Your Honor, if I could just be heard for
a second on several points that were just been made.
Number one, with respect to Mr. Diess, and in fact Mr. Horn.
Page 33 of your honor's decision, Your Honor said:
Quote, this is while plaintiffs allege in conclusory
fashion that, quote, Diess was involved in the day-to-day
operations of and exercised power and control over VWAG of
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America, VW of America, Audi of America, including, among
other things, directing their public statements and
regulatory actions cited in complaint 52. They provide no
additional allegations plausibly supporting this
assertion. The allegations and control with respect to
Horn and Browning are similarly lacking.
There's nothing in the amended complaint that is any
different that was in the first complaint that Your Honor said
had not been, at least as to Diess and as to Horn, that was
more particularized.
The problem, Your Honor, is the other side seems to forget
that what we're dealing with here is a Private Securities
Litigation Reform Act 9(b) Class Action case. They have a high
pleading burden. It's a different pleading burden than people
having normal cases. It's not a negligence case. You've got
to have particularized allegations.
In the PSLRA Congress said you've got to show who, what,
where, why, and who made the various statements. And the only
statements that we're now talking about are the financial
disclosures of the company. So they talk about Mr. Neuser.
They talk about Mr. Gottweis. There's no allegation that those
folks were involved in the financial disclosures of the
company. The only people that they can point to are Winterkorn
and Diess.
Now, as to Diess, they have nothing other than his
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knowledge of the existence of the defeat device in July, which
is right when he gets there.
As to Winterkorn, they certainly have allegations that he
knew about the existence of a defeat device. But what they
don't have, they don't have the connection. And what the
connection that they're missing are particularized allegations
that he knew that -- I mean, the fact that they had to be
defeat devices in these cars -- and we'll accept that
allegation for purposes, because Your Honor found scienter as
to Dr -- or Professor Winterkorn. They do not have
particularized allegations at all that he knew that this was
going to cause billions of dollars in exposure for the company.
In fact, the only allegation that's in their entire
complaint, the one, yes, I do like to quote it, at paragraph
249, is that he was told in November 2014 that this could be
dealt with on a cost of business fine of 20 million Euros.
That's the only allegation of any kind of particularized
allegation in this entire complaint, and they've had the
opportunity to replead.
Let's go back to CARB.
Made a big deal about the CARB statement. And then when
we actually questioned him, it came out that all they really
had was a newspaper article. Well, there's something called
the Freedom of Information Act. They could have made a Freedom
of Information Act request to CARB and gotten a copy of the
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letter, as opposed to relying on a newspaper article.
So they have absolutely nothing, other than speculation
saying, well, you didn't take enough of a reserve. And in
every single case that I have where there's wrongdoing, people
always make the argument, oh, your reserve wasn't taken at the
time when you knew about the fraud. And courts repeatedly
reject that argument because, number one, black letter law
under the securities laws says that you don't have an
obligation to disclose wrongdoing. You don't. That's not a
securities law violation. You've got to make -- if there's a
disclosure you have to make, and it's a false statement, then
it becomes a problem. But the mere fact that there's
wrongdoing going on in a company doesn't mean you have to open
the kimono and tell the world about it.
And in this particular case, as Your Honor correctly
pointed out, and as the other side of the case sort of
admitted, the biggest fine that had ever been was in a big
truck case involving a whole series of truck manufacturers, and
the total fine collectively was a billion dollars. The only
number that's in this complaint is the 20 million Euro number.
That's it.
Now, Mr. Horn, they talk about, you know, that he was
notified that, you know, I believe it was May 2014, of what the
theoretical fines were. There's no allegation in this
complaint at all that Dr -- that Professor Winterkorn -- sorry,
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but Germans have Professor Doctor. You could be both a
professor doctor and just a doctor, that's two years ago -- but
Professor, I think he's a professor doctor, Winterkorn, there's
no allegation that anyone told him what the fine levels were.
There's no allegation in this complaint that anyone told him
what the theoretical liability was other than the 20 million
Euro. That's the only thing. So what we're focused on here is
did he know the reserves were too low. And there's no
allegation, as Your Honor found correctly at page 30 of your
decision previously.
Let's see. And, again, you know, the point, the point
about Liang and Neuser and Gottweis, none of the Government's
Statement of Facts, complaints, make any allegation about the
company being under reserved. Professor Winterkorn is not
mentioned in the Statement of Facts. And as I mentioned before
in paragraph one, it was quite clear that the Statement of
Facts, the supervisors who were referenced did not include
management board level members, and that's paragraph one of the
Statement of Facts.
So we're exactly at the same position we were back when
Your Honor in your prior decision dismissed the claims that
were raised by plaintiffs saying that the company was under
reserved. They have nothing new to add. And they've had an
opportunity to replead. And Your Honor should dismiss those
claims at least with prejudice.
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THE COURT: Okay. I'm going to take it under
submission.
Did you want to respond?
MR. HARROD: Sure. You had previously said that you
were inclined to hold Mr. Horn in as a control person. Counsel
just addressed that. And I can address Horn if you'd like, but
if you are --
THE COURT: Well, you can say what you want to say.
Go ahead.
MR. HARROD: So the key argument that they make about
Horn as a control person is that he is not -- is this idea that
the person to have control has to have a relationship to the
statements, which we reject. And we believe that we've alleged
Horn has -- that's not their only argument. Their argument is
we don't allege enough of the facts and circumstances of his
control.
Horn was for 25 years in Wolfsburg, was sent to clean up
Volkswagen Group of America. He was supposedly handpicked by
Winterkorn and schooled, is the quote, in Volkswagen's inner
workings. These are all allegations that we added that are
referenced in paragraph 562 of the complaint. And the quote is
he came to the U.S. to enact profound change. These are in
addition to the allegations we had previously had that he was
the designee that Volkswagen picked to go to Congress when they
were investigating the diesel scandal.
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And it's undisputed that Horn admitted in Congress, and at
other times, that he learned of the defeat devices in May of
2014 while he was in charge of Volkswagen Group of America, and
apparently aware that he was making statements frequently in
press releases and brochures and marketing materials that the
cars comply. So if you're the CEO, as Mr. Giuffra described as
the marketing arm, which is a wholly-owned subsidiary of
Volkswagen AG, and you know that they're making these
statements, aren't you in a position to say maybe we shouldn't
say those things which are not true?
And, in fact, he -- we have allegations in the complaint
that he was involved. He asked for a report from engineers in
Germany about the ICCT study. He was involved in sending
emails in I think July of 2015 to members -- I believe it
includes members of the management board -- about the question
of potential certification for model year 2016 cars. One of
their arguments is he wasn't involved in making any of the
statements. But the certifications is one of the statements
that we allege to be false. And I think at worse for us those
communications reflect his knowing involvement in the
certification process. He's asking about the emissions study.
He's asking for answers. He gets an estimate of what the
potential fines and costs would be, and then he's emailing
people in Germany about the risk of not getting the model year
2016 cars approved for sale in the United States. I believe
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those facts support a finding of control and his involvement.
Thank you, Your Honor.
MR. GONZALEZ: Good morning, Your Honor. Joseph
Gonzalez.
Earlier in this hearing Your Honor indicated some concerns
with basing allegations solely on newspapers and articles
because, really, it's innuendo. It's kind of just
characterizing unsubstantial facts. That's basically what
plaintiffs did in their amended complaint. They indicated that
Mr. Horn was a long-time veteran, that he was handpicked, that
VW dealers believed he had the clout between U.S. markets. But
that's not what the Court asked him to do. What the Court said
is you failed to identify the specific circumstances of
control. Talking about the VA clout, talking about what he did
20 years ago doesn't answer that question.
THE COURT: Well, what about his testifying in
Congress?
MR. GONZALEZ: Your Honor, the fact that he testified
in Congress, which he made clear that he did not know about it,
doesn't show his control, okay. What it shows is that he chose
to appear on behalf of the company. But that doesn't show the
specific circumstances of the fraud alleged; it shows that he's
decided to make a statement for the company.
And what the Court asked him to do --
THE COURT: About what?
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MR. GONZALEZ: About the overall allegations, which is
precisely what he did. But the fact that he made a statement
about the overall allegations and agreed to appear and made
that statement doesn't respond to what the Court asked him to
do in the January decision: Public statements to regulatory
actions, identify the specific circumstances. He didn't do
that when he went up there. It doesn't mean that he did that
when he went up there. And so I don't think it's fair, given
the 9(b) rule pleading standard, to use that against him.
The second point plaintiffs make is that, look, he
received this email warning of the violations and the possible
fines. Scienter is no substitute for the specific
circumstances of control, and really that's what plaintiffs are
trying to do. They're saying, look, you found scienter, so
that's enough to establish specific circumstances of control.
It's not. And the example of him appearing before Congress is
a classic example of that. It doesn't show the specific
circumstances.
THE COURT: Thank you. I'm taking the matter under
submission.
MR. GONZALEZ: Thank you.
THE COURT: Let me turn to the Joint Status Report.
First, I found it very helpful and encouraging. I think
that the parties have done a spectacular job of implementing
these settlements. The logistics were daunting, and what --
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and one can make a number of observations. One is, of course,
with any new program, there can be problems, unanticipated
problems for the most part, but maybe somewhat anticipated.
And the -- I would say that the plaintiffs and the defendant
have responded to the concerns that were addressed by the
consumers in an effort to implement this program, which is
probably the largest, the buyback, in the history of the
automotive industry. Maybe one of the largest buybacks ever in
any product case. And we're not just talking about a product,
we're talking about an automobile. And as we've repeatedly
said, that can be the major asset that a consumer has, and has
with it all sorts of attributes being that -- the means by
which transportation achieved: The bringing of your children
to school, taking them home, getting to work, shopping, all
those things rely on transportation, and in this case, of
course, relied on the vehicle that they had purchased or
leased. And so the importance of it was never in doubt, and I
think that the parties have responded to that.
Frequently, in settlements, the effort goes to the
settlement and less of an effort goes to the implementation. I
don't think that's true in this case. From the reports that
the Court has received from, I guess it's Ankara, the
implementer, as well as simply the reports of the number of
calls that the plaintiff's steering committee responds to,
which are in the many, many thousands that Volkswagen's had to
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respond to indicates a serious and ongoing effort to achieve
justice for and compensation for the consumer. So that's what
the report details. And I would invite anyone who is
interested in the progress of this litigation to review the
Joint Status Report, which was filed on June 23rd.
I had a couple of questions that I wanted to direct to the
parties, and then of course hear from the parties if they want
to elaborate on where they are.
One of the requirements of the settlement was that a
substantial sum of money was required of VW -- I think the
amount was $2 billion -- to be placed in Zev, that's Zero
Emission Vehicles, infrastructure over four 30-month cycles.
And Volkswagen points out that they have created a wholly-owned
subsidiary named Electrify America whose mission it is to
implement Volkswagen's obligations under this agreement. They
then highlight what they have done in connection with
implementing this plan, which again the Court believes to be
impressive.
But where I have some concern, and that's perhaps because
I sit here in California, is what is happening on the
California front with respect to the ZEV? As the report
indicates, there have been ongoing discussions, and they have
been fruitful. They have been discussions in which parties
have -- going back and forth and making suggestions as to how
to implement I think it's $200 million in the California --
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must have been designated for California. I may be wrong in
that number.
MR. GIUFFRA: It's 800 million total over ten years,
and the first tranche is coming due now.
THE COURT: And that is 200?
MR. GIUFFRA: I think that's roughly right, yeah.
THE COURT: All right. Well, okay, so it's $800
million --
MR. GIUFFRA: Over ten years.
THE COURT: -- over ten years. Well, that's money.
And I was going to ask Mr. Akers if he could sort of give
me an update where we are.
MR. AKERS: Yes, Your Honor.
As we indicated in the status report, the parties have
been in discussions at a staff level intended to accomplish two
things, both to ensure that the ZEV plan is compliant with our
requirement to the Consent Decree, but also to ensure that
we're taking advantage of the expertise both of the Electrify
America staff and also ARB staff. Both entities do a fair
amount of work around zero emission vehicles and have knowledge
and expertise in this area.
Those have been fruitful discussions, and we anticipate
that an approvable ZEV investment plan supplement will be filed
with the Air Board this week. That will then be put out for
public comment. And there will be a notice meeting of the Air
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Resources Board for July where we hope that that will be
brought forth for approval.
THE COURT: So that's very good news. In other words,
it's your expectation that within this week CARB will publish a
proposal.
MR. AKERS: That's correct.
THE COURT: I mean, it's a proposal for public
comment. I understand there will be public comment.
MR. AKERS: That's correct, Your Honor. The plan
supplement will be submitted by Electrify America to ARB, which
will then publish it, and then it will then be set for a
hearing before the Board in July.
THE COURT: Okay. Well, that seems encouraging.
Thank you.
MR. AKERS: Thank you, sir.
THE COURT: Where are we on the Mitigation Trust?
That is -- also seems to be a little bit of money. It's
900 million.
(Laughter)
THE COURT: That's real money.
MR. VAN EATON: Your Honor, it's even realer than
that.
THE COURT: Even you, you're the Government, does that
900 million seem like real money?
MR. VAN EATON: That's actually 2.7 billion of which
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the 900 million is the first --
THE COURT: Oh.
MR. VAN EATON: -- and then on top, that's from the
2 billion, another 225 million included, so just shy of
3 billion total for the Mitigation Trust.
THE COURT: Now that's real money.
(Laughter)
MR. VAN EATON: Real money, undeniably.
So Your Honor, you appointed the trustee. The parties
have been negotiating a trust document. You'll recall in the
2-liter deal we had attached at the time what we called
Appendix D, which was a form of a trust. It turns out that
there were a number of issues from the perspective of an actual
trustee that we may not have contemplated in Appendix D. So
there have been a lot of issues to work through that we just
did not previously anticipate.
The progress is they're good. We anticipate being able to
file -- you'll recall the Consent Decree that requires the
United States to file the document with the Court, at which
point it will become active, and we anticipate being able to do
that in the very near future.
In the meantime, there's no indication that, you know,
we've had any problem with implementation. Volkswagen timely
paid the first payment. Interest has been accruing on those
payments. All of the consultations that are required under the
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Consent Decree have taken place. And really this is just a
matter of sorting out the details of a very complicated trust
document and an unprecedented trust document for a very large
amount of money.
THE COURT: Well, who is negotiating this trust
document? I mean, obviously, you are on behalf of the
Government, but it's some third party, the trustee, that has to
have certain powers and certain responsibilities, and that is
what's complicated.
MR. VAN EATON: Correct. So the Trust has, as you
would expect, retained outside counsel, who we are negotiating
with. Also heavily involved in the negotiations are attorneys
representing the State Attorney Generals, who of course are the
beneficiaries under the Trust. And so there is a coalition of
states that have a representative. Mr. Akers, on behalf of
California is involved as well. We have also had ongoing
consultation with representatives of the tribal interests,
which are also beneficiaries under the Trust.
THE COURT: So how many people are you negotiating
with?
MR. VAN EATON: Everybody but Volkswagen.
(Laughter)
THE COURT: Well, so like there are 50 --
MR. VAN EATON: No, no, it's not all states. There is
a representative. The Attorney General Office for the state of
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New York has been throughout, you know, the course of this
litigation is the primary point of contact for us, and that's
who we interface with, and then they take a message to and then
bring a message from the remainder of the states.
So really the team is California Attorney General's
Office, New York Attorney General's Office, and the Justice
Department negotiating with counsel for the Trust.
THE COURT: Well, that's very good.
MR. VAN EATON: Manageable.
THE COURT: Right. Now, you say near future, which is
one of those terms that gives me some pause.
MR. VAN EATON: Weeks, Your Honor.
THE COURT: Weeks?
MR. VAN EATON: Weeks not months, is what is my best
guess.
THE COURT: Weeks. Do you have a number?
MR. VAN EATON: I dare not.
THE COURT: Well, weeks not months means like three.
MR. VAN EATON: I suppose it's less than four.
THE COURT: Okay. But I want -- I want -- I'm
requesting that you file within 30 days an update as to where
we are on that. I don't want -- we have a lot of money sitting
in the Court Registry, and that money should be disbursed for
its intended purposes, and so I want to keep --
MR. VAN EATON: Absolutely, Your Honor, happy to file
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an update within 30 days. The United States absolutely shares
that sentiment. We are eager to get the money accessible to
the states and other beneficiaries to start implementing these
projects.
And you mentioned the Registry, we also have a pending
motion before the Court to waive the investment fees and the
Registry on that money to ensure that every last dime can go
towards the intended purpose.
THE COURT: And that's a matter that I'll consider.
MR. VAN EATON: Thank you.
THE COURT: I'm trying in my own mind to think about
whether there are costs associated with maintaining the
Registry, and so forth, that ought to fairly be allocated to
satisfy those costs. But I understand the Government sits in a
separate position with respect to it, by statute, I think, and
so I'll take a look at that and act on it --
MR. VAN EATON: Thank you.
THE COURT: -- soon enough.
MR. VAN EATON: Anything further?
THE COURT: No.
MR. VAN EATON: Thank you very much.
THE COURT: Well, Ms. Cabraser, do you have anything
you'd like to add to this morning's discussion?
MS. CABRASER: Thank you, Your Honor.
The details of the status in progress of the claims
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program to date are contained in the Joint Status Report and
also the June 26th, 2017 32-page report of Ankara, the claims
supervisor, complete with charts and graphs and many
statistics.
I would say this, not to repeat what is in those reports,
putting those reports together, and obviously the statistics
change daily, just by way of general overview we're
approximately eight months into a 23-month claim period. That
is, we're just over one-third of the way into the claim period
for the 2-liter vehicles. Even though we're one-third of the
way in, already nearly 62 percent of the vehicles are
participating either as bought back vehicles or vehicles to
which modifications have been performed. So that's one-third
of the way in, nearly two-thirds of the program accomplished.
There's an 85 percent participation rate for vehicles, and so
the program is well ahead of schedule.
As the Claims Supervisor reports, nearly 408,000 of the
claims -- of the Class Members have already made claims in the
program. And combining claims paid and offers made to these
Class Members already, that puts the total dollars at over
7 billion.
As the Court is aware, in most class action claims period
the rush comes at the end, and we do expect a rush at the end
of this claims period. Everyone is geared up for it. But we
also had a massive rush at the beginning that was capitalized
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by the sheer volume of the benefits and the positive reception
that the settlement received among Class Members.
It's interesting to note that as the claims period has
progressed and settlements promises have become realities, the
settlement has become more, not less attractive to the Class
Members. That is, the reality has lived up to the promise, and
we know this statistically because as of today -- and, again,
this number changes daily -- 425 Class Members who previously
opted out have withdrawn their opt-out requests or otherwise
participated in the Settlement Agreement and signed individual
releases. So the traffic is one way, and the traffic is in.
These are all big numbers, big dollars paid out, over a
hundred thousand Class Member communications with the PSC, and
that doesn't count all of the communications with the Call
Center and the settlement web site, and it doesn't count the
hundreds of people from Volkswagen entities that Volkswagen
contracted with to implement the settlement: The Claims
Supervisor, the dealers, the PSC response team. It's taken an
army of people and a new infrastructure to make this work.
We, on the PSC, have used the technique of basically
riding along with Claim Members -- Class Members sometimes
literally to see what, if any, questions or problems there are
in getting through the claims process and getting through the
actual buyback to the check or to the modification of the car
and the settlement payment. And that's enabled us to surface
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problems early with Volkswagen Claims Supervisor, and that's
enabled the parties working together to solve those problems to
improve the process, and to put new techniques into play, so
that for most people, most of the time in the Class, the
settlement process is working very smoothly, and we know that
because of the feedback that we're getting from Class Members.
Class action settlements work well with large scale
problems with thousands of people, with many, many claims, but
they also work best when they attend to the details and the
realities of solving the problem at hand. And we can report to
the Court that this settlement as implemented by the parties is
doing that.
So the big things are being accomplished. The statistics
tell you that. But the small things matter too. And with your
permission, I'm going to share with you just a very brief note
we received from Class Member Margaret Hobert from Southern
California. She says:
"Toward the end of February of this year, after I
researched the Volkswagen dealerships in the area, I went
to Riverside Volkswagen, about 40 miles from here. I was
thoroughly surprised when they took my 2015 Jetta, the
model I had researched for a year before I purchased it,
and the one that had approximately 4,000 miles on it at
the time of the scandal. By afternoon I was able to drive
back home in a 2017 metallic blue Jetta with the complete
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safety package, which was my reason for buying the car in
the first place. The buyback of my original car plus the
penalty that Volkswagen paid covered the new car as well
as six years of pre-paid annual service plus heated seats.
(Laughter)
"I don't want to forget to tell you about the heated
seats. At 76, I'm one of the designated drivers for the
older members of my retirement community." And she
describes how she drives one woman to her eye
appointments. "I told her that I had heated her seat up
for her before she got in. Oh, no, I don't need anything
as fancy as that, she protested. I know she has a really
painful back problem, and she actually oozed into and out
of the passenger seat. Now she knows each month that she
gets a safe ride to and from her eye doctors, and a
comfortable heated seat both ways. I really love that. I
hope that nothing like the Volkswagen mess ever happens
again. Our environment needs all the help it can get."
This class member was able to take part actively in
solving the problem that outraged her. She became a part of
the solution. It empowered her. The settlement has empowered
thousands of other consumers to do the same. We thank the
Court for the opportunity to be a part of that.
THE COURT: Thank you. Let me ask you a question.
The opt-outs which you've raised, that a number of them, I
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think the number you gave is 486, but some number like that,
came back into the settlement -- is that correct? -- there was
some number --
MS. CABRASER: That's correct, as of this morning,
425.
THE COURT: 425. So let's assume for a moment that
there is, listening to this colloquy, some consumer who opted
out of the -- we'll take the 2-liter Settlement -- opted out.
Is it possible -- and maybe I have to ask VW this -- but is it
possible that that person can change their mind and opt in?
MS. CABRASER: Your Honor, the rule is that once an
opt out, always an opt out, and the reason for that is so that
the people don't use a class action settlement as a revolving
door.
In this case, Volkswagen has agreed on a class member by
class member basis to entertain withdrawals of opt-outs, and
you'd have to confirm that with Volkswagen's counsel. But it's
my understanding that they are receptive to doing that for
opt-outs who want to come in and participate in the settlement
program.
THE COURT: In other words, I understand, but this --
and, Ms. Nelles, you can address this.
MS. NELLES: Thank you.
THE COURT: It's not a function of negotiation. That
is to say, they're not going to sit outside and say, look, if
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you give us an extra heated seat, extra rear heated seats, I'll
join in on the settlement.
(Laughter)
MS. NELLES: I have a lot of those negotiations, Your
Honor.
THE COURT: Well, why don't you just tell us a little
bit about that, because I think that it is of interest --
obviously, it's the Court's interest to ensure that any
consumer has the benefit of a settlement and understands --
understands, and is given ample opportunity to consider whether
to come in or not.
MS. NELLES: Yes, Your Honor. And I will alert the
Court that it's a slightly sensitive topic, as many of the
opt-outs are represented by counsel. And the Court may recall
that with the other urging of Judge Cox in Detroit, the company
did open up a period for people who had opted out to join the
settlement for the 2 liters, and we have agreed to do the same
for the 3 liters.
We had a little bit of a kerfuffle when some
represented -- I would say the lawyers -- misrepresented
parties felt that perhaps we were communicating with their
clients when we shouldn't be.
So I just want to note that at the same time, as, Your
Honor, I believe we discussed before, and certainly we have
discussed with plaintiffs, Volkswagen believes this is an
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excellent settlement. We believe it has been proven, and seen
as such by the extreme interest in the settlement. And we
remain completely open to allowing anybody at this juncture who
would like to join the settlement to joint the settlement, and
to do that all they need to do is contact Volkswagen.
But again, I just want to make sure that I am carefully
protecting Volkswagen from any concern about reaching out to
represented parties.
THE COURT: Right. You don't have to reach out,
because by reaching out your concern is that you will somehow
run afoul of an accusation that you are circumventing their
rights to counsel, and so forth.
However, the Court doesn't have that concern.
(Laughter)
First of all, notwithstanding how much money is in the
Registry of the Court, I am judgment proof.
(Laughter)
And secondly, I think it is my responsibility to reach out
to any Class Member or any potential Class Member to tell them
that there is the advantage of this particular settlement, and
that it's not too late for them to think about it in terms of
what's to their economic advantage.
I think that's --
MS. NELLES: It is absolutely not too late. I know
we've been going a long time, but if Your Honor will indulge
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me, I just have a few highlights from the report, if that's all
right.
THE COURT: Sure.
MS. NELLES: And I just want to note, Ms. Cabraser
noted that the company has modified or removed from commerce
some 61 percent of the affected 2-liter vehicles. That's
61 percent of the 2-liter TDIs that are subject to the First
Partial Consent Decree.
I think it's just worth noting for Your Honor, we have --
about 290 of those more than 300,000 vehicles were acquired
through this particular 2-liter settlement, and about 273,000
of those vehicles were repurchases, 10,000 were early lease
terminations, and another 10,000 were complete or partial
emission modifications. The statistic that I'd like to add is
that about another 80,000 vehicles are currently in the
settlement pipeline. So we are really well, well on the way to
meeting the goals of the settlement. That means we have 80,000
were validations complete, offers have been extended, and many
of those already have scheduled appointments.
I also think it's worth noting that Volkswagen expects
that the ratio modifications to buybacks is going to increase
as the program continues. To date, the modification of the
Generation 3 vehicles was approved in January. The
modification of the Generation 2 automatic transmissions was
approved just in May, and now we're just waiting to hear on Gen
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1s at this time. And as we receive those approvals, we've seen
growing enthusiasm for the modification.
I know Your Honor would be interested to hear that with
the help of the DOJ in particular, Volkswagen has launched a
program to make the settlement benefits available to service
personnel, and personnel -- other personnel deployed overseas.
We're also assisting consumers in remote U.S. locations, so
that they are able to take advantage, particularly certain
areas in Hawaii.
And of course there have been, as you heard and read, a
lot of process improvements. I believe we have a little chart
that's attached to the Status Report, and it shows that one of
the metrics -- and there's a number of calls received. And I
know Ms. Cabraser receives thousands of calls, and I know this
because Ms. Cabraser and I talk often about those calls.
And Volkswagen, with respect to just the 2-liter
Settlement Program, received more than 1,650,000 calls. And I
think you -- and what I think is a testament to how much
progress has been made in the settlement is when we were
receiving 10,000 plus calls daily, that amount grows fewer and
fewer all the time.
And one of the -- one thing we haven't touched on today is
the 3-liter Settlement Program. And of course we have taken
all that learning from the 2-liter Program and leveraged it
into putting together the 3-liter Settlement Program. And when
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Final Approval was granted on May 17, the Claims Portal went
live on May 18. We are receiving in the nature of a handful of
a couple hundred calls daily, not tens of thousands, 500, 600,
which I think really indicates how streamlined the process has
become for consumers, with the assistance of all these fine
people in this room.
And to date more than 43,000 claims have been submitted.
So we're five weeks into that Program, 43,000 claims, that's
more than 50 percent of the total population of the affected
vehicles. So eight months in we have this enormous outpouring
on the 2-liter, over 61 percent. Five weeks into the 3-liter,
we're already at over 50 percent. In fact, we'll be -- we have
13,000 accepted offers. We have appointments that are going to
begin as soon as next week.
And I think, importantly, we also -- to note that we
remain on track in terms of obtaining approvals for the
emissions compliant repair, that's the so-called fix for the
3-liter of the Generation 2 vehicles, and the 3-liter.
Volkswagen has submitted proposals for all of the Generation 2
vehicles for emission compliant repairs, and we're now
continuing to work on proposals for modifications for the
3-liter Generation 1 cars.
So it really -- we couldn't be more pleased that we were
able to start this Joint Status Report by saying that the
parties agree on how great it is and how much substantial
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progress has been made in every aspect of this joint effort.
And of course that couldn't have been done without the effort
of all these people, many, many third parties, and of course
the Court itself.
And with respect to even the 2-liter or the 3-liter, if
there is any opt-out that wants to respond to the outreach of
the Court, they are free to do so simply by accessing the VW
web site, the Claims Portal. That is all that needs to be
done. Thank you.
THE COURT: Thank you. I'd like to hear from Bosch.
Mr. Slater.
MR. SLATER: Thank you, Your Honor.
On our side it's a somewhat simpler process, made simpler
because of the efforts that were made by the PSC and by
Volkswagen previously in setting up the Program, and in
addition the efforts of Epiq and Ankara, both in terms of
outreach and in terms of administration.
Just shy of one month after Final Approval of the Bosch
settlement, close to 250,000 checks had already been issued, so
well over a third of the total possible Class Members had
already been sent a check.
The check cashing rate seems to be moving apace as well,
and we think that shows both the effort that has been made
beforehand, primarily by other people, and also the receptivity
of the Class to the settlement. We hope it will continue
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smoothly.
For our part, we would be open to opt-outs coming into the
settlement at this point. We think PSC will need to consent as
well, but there should be room within the program to do so if
there is interest.
Thank you, Your Honor.
THE COURT: I would be remiss if I didn't point out
that none of this would have happened without the considerable
effort of the Settlement Master. He, from our point of view,
regrettably left this task. For the most part it was resolved.
But he sought government employment --
(Laughter)
THE COURT: -- and that has its attractions and
uncertainties.
(Laughter)
So I would thank once again publicly Robert Mueller, the
Former Director of the Federal Bureau of Investigation, his
Chief Assistant James Quarles, and also Aaron Zebley, who, the
three of them, and others at Wilmer Hale, for their
extraordinary service to bringing about civil justice in this
matter. I just simply want to acknowledge that.
Well, the Court has a number of things under consideration
it has to resolve going forward. There are motions to dismiss
on the -- what is this matter that I presently have, a motion
to dismiss on the dealer Bosch matters. There are fees that
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the Court has to address. There are questions of -- ultimately
the question now is what to do with one of the state actions, I
think it's Wyoming. There's also a resolution of remand
motions, which the Court will turn to in due course, and that's
a term of art. And so there is a lot of unfinished business.
But of course from a consumer's point of view much of the
business has been finished.
And I want to thank the parties and everyone here in court
for all their fine work.
And we will be in recess. And I will see you at the next
calling, at least some of you.
Thank you. We're in recess.
ALL COUNSEL: Thank you, Your Honor.
(Proceedings adjourned at 9:37 a.m.)
---oOo---
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CERTIFICATE OF REPORTER
I certify that the foregoing is a correct transcript
from the record of proceedings in the above-entitled matter.
DATE: Wednesday, June 28, 2017
_________________________________________
Rhonda L. Aquilina, CSR No. 9956, RMR, CRR Court Reporter
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